Dave Ramsey: What's so special about $1 million?

Q: I’ve heard you say many times you shouldn’t buy a brand-new car unless you have a net worth of $1 million. What’s so special about a million dollars?

A: In all honesty, there’s nothing particularly special about one million dollars. A brand-new car will lose about 60 percent of its value in the first four years. So, if you’re going to turn a $30,000 investment into $12,000, you’ve got to have a bunch of money. You’ve got to be in pretty great financial shape in order to absorb the blow.

If your entire net worth is $100,000, and you put $30,000 of it into a vehicle that will lose 60 percent of its value, you’re just being financially and mathematically stupid.

There’s really nothing special about $1 million. I could have said $2 million or $900,000, but $1 million is easy to remember. Plus, it’s nothing to sneeze at in terms of an individual’s net worth. When you lose a lot, and it’s a small percentage of a lot, you don’t have to worry so much. But when you lose a lot and you didn’t have much to begin with, that’s a recipe for financial disaster!

Q: My parents co-signed on government loans so I could go to college. Would my forbearance or non-payment affect their credit if I don’t pay?

A: Yes. I’m not trying to lay a guilt trip on you, but you’ll be trashing your mom and dad’s credit if you don’t pay the bills on time. If they co-signed for you, they’ll start getting phone calls, too, if you don’t do the right thing and pay back these loans.

The truth is, your mom and dad shouldn’t have co-signed for you in the first place. There’s only one reason lenders want a co-signer, and that’s because they’re afraid the person taking out the loan won’t be able to pay back what’s owed.

My goal here isn’t to beat you up. It’s to give you information that you need in order to make smarter decisions in the future. We all do dumb things sometimes. In the past, I did some really dumb things with very large numbers attached. The goal is to try to use what we learn in order to do fewer dumb things in the future.

Q: I’m 26, and I just started a new job making $50K. I’ve also been offered a 401(k) with no match. Should I put money into the 401(k) or open a high-yield CD?

A: I’ve got another idea. I’d open a Roth IRA with good growth stock mutual funds inside and fund it up to $5,500 a year. Make sure these mutual funds have been open at least five years — preferably 10 years or more — and have performed well. Mathematically, this investment, growing tax-free, will be superior to a non-matching 401(k).

Then, if you want to invest more than $5,500, you could put some additional money into the 401(k) offered by your company. Again, make sure you’re invested in good growth stock mutual funds with long, successful track records.